A Retrospective Look at Rescuing and Restructuring General Motors and Chrysler
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NBER WORKING PAPER SERIES A RETROSPECTIVE LOOK AT RESCUING AND RESTRUCTURING GENERAL MOTORS AND CHRYSLER Austan D. Goolsbee Alan B. Krueger Working Paper 21000 http://www.nber.org/papers/w21000 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 March 2015 The authors are grateful to Anthony Casey, Steve Rattner, Harry Wilson, Tim Taylor, David Autor and Chang-Tai Hsieh for helpful comments, and to David Cho and Loullya Saney for excellent research assistance. This paper was prepared for the Journal of Economic Perspectives. Austan Goolsbee wishes to thank the University of Chicago Booth School of Business's Initiative on Global Markets for financial support. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer- reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications. © 2015 by Austan D. Goolsbee and Alan B. Krueger. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source. A Retrospective Look at Rescuing and Restructuring General Motors and Chrysler Austan D. Goolsbee and Alan B. Krueger NBER Working Paper No. 21000 March 2015 JEL No. E0,G01,G33,H0,J01,L50,L62 ABSTRACT This paper takes a retrospective look at the U.S. government’s effort to rescue and restructure General Motors and Chrysler in the midst of the 2009 economic and financial crisis. The paper describes how two of the largest industrial companies in the world came to seek a bailout from the U.S. government, the analysis used to evaluate their request, and the steps taken by the government to rescue them. The paper also summarizes the performance of the U.S. auto industry since the bailout and draws some general lessons from the episode. Austan D. Goolsbee Booth School of Business University of Chicago 5807 S. Woodlawn Avenue Chicago, IL 60637 and NBER [email protected] Alan B. Krueger Industrial Relations Section Firestone Library, Room A2H Princeton University Princeton, NJ 08544 and NBER [email protected] The rescue of the U.S. automobile industry amid the 2008-2009 recession and financial crisis was a consequential, controversial, and difficult decision made at a fraught moment for the U.S. economy. Both of us were involved in the decision process at the time, but since have moved back to academia. As more than five years have passed since the bailout began, it is timely to look back at this unusual episode of economic policymaking to consider what we got right, what we got wrong, and why. We are pleased and a bit surprised by how well the last five years have played out for the domestic auto industry. At a critical point in the internal debate over the auto industry bailouts in March 2009, Larry Summers, at that time director of the National Economic Council, assembled members of the Obama administration’s economic and autos team around his cramped table in the West Wing of the White House. He held a straw vote on whether the advisors believed Chrysler would survive for five years if a government-supported merger with Fiat went through. A narrow majority, including us, voted no. Five years on, both General Motors and Chrysler have survived, rebounded and, by many metrics, appear healthy. Economic analysis contributed throughout the process of deciding how to respond to the auto companies’ requests for extraordinary support, and President Obama weighed the economic arguments as well as the political and social realities. We agreed with others in the administration that it was essential to rescue GM to prevent an uncontrolled bankruptcy and the failure of countless suppliers, with potentially systemic effects that could sink the entire auto industry. Our analysis suggested that a failure of the much smaller Chrysler, however, would not have systemic effects for the whole industry and that rescuing the company would make it more difficult and more costly for taxpayers to rescue GM, although we recognized that a failure of Chrysler would cause considerable hardship to its workers and their families and communities. 2 In the end, the president made the decision to rescue both Chrysler and GM and to put them through a tough restructuring via bankruptcy. It is hard to argue that this decision did not deliver important economic benefits to the recovery and country, although the government did not recover the full amount of TARP funds it invested. If Chrysler and GM had been allowed to fail, in all likelihood the Great Recession would have been deeper and longer, and the recovery that began in mid-2009 would have been weaker. The rescue has been more successful than almost anyone predicted at the time. Some of this improvement resulted from actions the auto companies took; some happened because consumer demand for autos has been especially strong during the last five years. The auto industry has turned out to be one of the drivers of the economic recovery. Yet we suspect that the conditions that led the auto bailout to be a success were fairly unique in American economic history, and, we hope, unlikely to be repeated anytime soon. In this article we describe the events that brought two of the largest industrial companies in the world to seek a bailout from the U.S. government, the analysis that was used to evaluate the decision (including what the alternatives were and whether a rescue would even work), the steps that were taken to rescue and restructure Chrysler and GM, and the performance of the U.S. auto industry since the bailout. We close with some of the general lessons to be learned from the episode. How the U.S. Auto Industry Imploded In the run-up to the 2009 bailout, the Big Three automakers recorded some of the worst corporate performances in American history. General Motors alone lost almost $40 billion in 2007 and another $31 billion in 2008. Ford lost $3 billion and then $15 billion. Chrysler was a 3 privately held company that did not disclose earnings publicly, but was losing comparable amounts of money. When the Great Recession began in late 2007, it had a catastrophic impact on the automakers. Auto sales plummeted in 2008 and again in 2009 to below 10 million, from a peak of mover than 17 million just a few years earlier. By fall 2008, the financial situation of the domestic auto-makers was so dire that they would soon be unable to make their wage and supplier payments. In November 2008, the CEOs of Ford, General Motors, and Chrysler came before the House and the Senate to request a $25 billion working capital "bridge loan" from the U.S. government to enable them to make these payments and to help keep them out of bankruptcy and avoid possible liquidation. In the auto executives' view, the crisis they were facing centered on macroeconomic forces outside of their control. Chrysler CEO Robert Nardelli (2008) explained at the outset of the hearing, "We are asking for assistance for one reason: To address the devastating automotive industry recession caused by our Nation's financial meltdown." He said that buyers' and dealers' lack of access to credit was preventing them from buying vehicles and wrecking their business. They were asking for capital to tide them over, with no conditions attached, until conditions returned to normal so that they could avoid bankruptcy or liquidation. But of course, no one knew if the 17 million annual sales rates achieved earlier in the 2000s would ever return. Auto credit had been unsustainably inflated by the same housing and credit bubble that led to the economic crisis in 2008. The ratio of cars-to-population and the fraction of auto buyers stretching their credit by using subprime auto loans were both at record highs. If demand rebounded only partway toward its previous high after the recession ended, it was not clear that all of the “Big Three” automakers could survive. 4 When critics highlighted the U.S. auto industry's decades-old problems of high cost, questionable quality, and the like, the executives argued that they had already done the restructuring necessary to fix those problems. In reality, though, the Big Three automakers' problems had built up over many years, and were certainly not solely a result of the economic downturn. Falling demand was a persistent and severe problem for the Big Three. Market share trends weighed heavily against them. Figure 1 plots the U.S. market share of each of the Big Three automakers in the decades running up to the crisis, as a percentage of total auto sales. There was a sustained and substantial downward trend in demand of more than 2 percentage points per year for the Big Three combined. The Big Three’s share in 1998 was 71 percent; by 2008, it was 47 percent. These negative trends were especially severe for GM, the largest of the domestic companies. Figure 2: "Big Three" Automakers' Shares of U.S. Total Vehicle Sales Percent 55 50 General Motors 45 40 35 1988-2008 Trendline 30 Ford 25 1988-2008 20 Trendline Chrysler 15 1988-2008 Trendline 10 2014 5 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011 2016 5 If anything, these declines in market share understate the severity of the dwindling demand facing the manufacturers. The Big Three had been engaged in substantial price discounting relative to the competition.